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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Sell at Split-Off or Process Further

Bozo Inc. manufactures two products from a joint production process. The joint process costs $110,000 and yields 6,000 pounds of LTE compound and 14,000 pounds of HS compound. LTE can be sold at split-off for $55 per pound. HS can be sold at split-off for $9 per pound. A buyer of HS asked Bozo to process HS further into CS compound. If HS were processed further, it would cost $34,000 to turn 14,000 pounds of HS into 4,000 pounds of CS. The CS would sell for $45 per pound.

Required:

  1. 1. What is the contribution to income from selling the 14,000 pounds of HS at split-off?
  2. 2. CONCEPTUAL CONNECTION What is the contribution to income from processing the 14,000 pounds of HS into 4,000 pounds of CS? Should Bozo continue to sell the HS at split-off or process it further into CS?

1.

To determine

Calculate the amount of contribution to income from the sale of 14,000 pounds of HS at split-off.

Explanation

Sell-or-Process-Further Decision:

Sell-or-process further decision can be defined as the analysis of relevant costing which emphasizes on decision making regarding whether to process the product beyond its split-off point.

Use the following formula to calculate the contribution margin at split-off:

Contribution margin=Quantity of compound HS×Split-off price

Substitute 14,000 pounds for the quantity of compound HS and $9 for the split-off price in the above formula

2.

To determine

Calculate the amount of contribution margin from processing the Compound HS into Compound CS. Also, describe whether B Inc. should sell the HS or process further.

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